1. Two consumers Justin and Cindy of the same product have the following demand curves: Q₁ = 500 - 10 P and Q₂ = 500 - 20 P. The marginal cost (MC) for the firm is $10. Calculate the prices when the firm discriminates between the two consumers. Is this a good strategy, or should the firm charge the same price to both of them?

2. The route from New York City to Albany is served by only two airlines, American and Delta. The payoffs from discounting or maintaining high prices are as below.

                                            DELTA'S MAINTAIN   DELTA'S DISCOUNT

American's                                                $26,000                                   $32,000

MAINTAIN                            $24,000                                   $18,000

AMERICAN'S                                                $21,000                                   $16,000

DISCOUNT                            $28,000                                   $12,000

Is there a dominant strategy?

What is (are) the Nash equilibrium (equilibria)? Explain.

Is there a mixed equilibrium strategy?

What behavior would you predict for Delta in a one-play game and why?

3. Assume D represents the level of decentralization of corporate decision-making. The benefits of decentralization, denoted B, = 3D and the costs of decentralization, denoted, C = 2D + 2D₂. What is the optimal level of decentralization (D)? Explain.

4. Anna Chang is a sales agent for XYZ Company. She has an effort cost function of C = e2 and a reservation wage of $1,500. Her wage package is W = 1,500 + 0.2Q where the CEO sets the incentive at 0.2 and Q = 200e. Q is the output. If the CEO increases the incentive from 0.2 to 0.25, what happens to the Anna's effort? Will profits rise or fall?

5. Great Cars, Inc. faces the following demand function for its automobiles:

P = 55,000 - 200 Q

Its marginal cost (MC) is $9,000. What will its price be if it decides to sell the automobiles by itself and what will the price be if it sells though DistriCorp, Inc. an independent distributor. Note that when Great Cars, Inc. contracts with DistriCorp, it has to take into account that DistriCoro faces the same demand curve. What is the consequence of this exclusive dealing on prices?

6. Some years ago, conservation groups paid cattlemen in the Western United States to move their herds away from wild buffalo herds so that the buffalo would have more feed and would not have to compete with the cattle. What is the relevance of the Coase Theorem in this case?